In a couple of previous posts, I have talked about methods for company valuations. But regardless of what method to use, it is perhaps even more interesting to think about what actually can be done to impact the valuation.

Yesterday I was attending a conference with Swedish Trade Council and among the presenters was Niklas Edler from an M&A and valuation institute called Skarpa who mentioned the following factors:

1. Transfer human capital to structural capital – reduce dependence on key individuals
2. Bridge the information gap between the seller and the buyer – the seller knows more than the buyer who as a result will discount the price based on the uncertainty
3. Create foundation for positive development – revenue growth, margin improvements
4. Financial transparency – reporting, follow accounting rules etc
5. Formalize the company – don’t mix personal and company business
6. Minimize owner dependencies – the buyer don’t want the company to be depending on previous owners
7. Clean up the balance sheet
8. Minimize risk in company – avoid depending on one product or customer
9. Show profitability – cut costs, improve margins etc

Looking at the various points they all pretty much come back to two things:

  • Financial results (which impact all the valuation methods)
  • Risk (buyers don’t like risk)

Another way of looking at it is that the financial results is the basis for the valuation. Strong, profitable growth is often the most important component to drive up value.

Then the risk relates to various amount of discount. Try to remove the risks and make it easy for someone to buy your company by for example having things in order, decrease dependence on key people and owners.

However, most really successful exits have that extra component which is not only attributable to financials or risks. It is that strategic value that some or several buyers may see in your business or technology. Oftentimes this is even more important to the end-valuation but it is really hard to foresee and build a company on. So my advice would be to work hard with the general value drivers and make sure they are top-notch. Then if you on top of it can navigate yourself to a valuable position with tons of strategic value that’s fantastic.